Wednesday, November 19, 2014

From December 2013 to March 2014, gross job gains from opening and expanding private sector establishments were 6.9 million, a decrease of 440,000 jobs from the previous quarter, the U.S. Bureau of Labor Statistics reported today. Over this period, gross job losses from closing and contracting private sector establishments were 6.5 million, a decrease of 94,000 jobs from the previous quarter.

This release incorporates the BED annual revisions, but I am not seeing any changes.

I like this data series, with some caveats.* If you're not familiar with this series, note that gross flows are large relative to net flows. Roughly speaking, think of the Great Recession as involving about 8.5 million net job losses. Entering and expanding business establishments create at least half that many jobs even in terrible quarters, but a recession is characterized by even larger numbers of jobs being destroying by shrinking or closing establishments.

I like to slice the data by extensive margin (opening or closing business establishments) and intensive margin (expanding or contracting business establishments). Figure 1 reports the flows of employment associated with opening and closing establishments, and Figure 2 reports actual numbers of establishments that opened or closed (click for larger images).

Figure 1

Figure 2

Reallocation at the extensive margin dropped pretty noticeably in early 2014. Most of the drop was driven by a decline in entry. This helps explain some other economic data we saw in early 2014.

At the intensive margin we see a slight decline in reallocation, but clearly the overall numbers are being driven by the entry margin. There was a collapse in new establishment formation in early 2014.

This is not a great report, but it's too early to assume that we are starting a bad trend. The jobs from entry number has fallen to levels we saw in 2012, which weren't terrible at the time. But I would say that those who think a revival in new businesses is right around the corner will have to keep waiting.

Now some usual thoughts: gross flows give us an idea of where jobs are being created and destroyed, which fleshes out the net job numbers that are more popular (and timely). For policymakers, it matters whether job market problems are being driven by establishment turnover or job flows in existing establishments. In my (hasty) view, these latest numbers suggest cause for minor concern about the entry margin.

More broadly, these data help dissuade us from thinking in representative agent terms, which is what the net numbers incline people to do. It's tempting to think that net numbers tell us about the experience of most businesses, but in reality there is a lot of heterogeneity among firms and reallocation proceeds at a high pace. In my view this complicates macro analysis somewhat, rendering simple "aggregate demand/supply" heuristics somewhat tricky.

*The BED are quarterly data provided from the BLS based on state UI data. They are released with a lag of about 8 months. Like the BDS (the dataset I usually use here), the BED basically covers the universe of private nonfarm employers; unlike the BDS, the BED is available at higher frequency and is released more quickly. BED has other drawbacks compared to the BDS, such as a more limited ability to track firms.The BLS effectively expanded the sample definition in the first quarter of 2013. The 2013q1 observation was the most obviously affected, as it reported all establishments that were added to the sample as establishment openings. For openings data, I have replaced the 2013q1 observation with the average of 2012q4 and 2013q2. I haven't dug into the data enough to know whether users can manually correct for this over the longer run. See BLS discussion here, on the bottom of the page ("Administrative Change Affecting...").It is also important to note that these numbers are seasonally adjusted, and any guess at net numbers based on the difference between two seasonally adjusted series is very, very rough. Non-SA numbers are available on the BLS website.These numbers track business establishments, which are different from firms. Costco is a firm; your local Costco store is an establishment. Most firms consist of only one establishment. The BED is not ideal for tracking firms, as it has limited ability to correctly link establishments to the firm level.

Tuesday, November 4, 2014

Business leaders often give remarkably bad economic advice. . . . Success in business does not seem to convey any special insight into economic policy. . . .

National economic policy, even in small countries, needs to take into account kinds of feedback that rarely matter in business life. For example, even the biggest corporations sell only a small fraction of what they make to their own workers, whereas even very small countries mostly sell goods and services to themselves.

The suggestion that business experience conveys no special economic policy insights is, frankly, totally absurd. It's way too easy for economists to say "Only we economists can truly understand the economy" when there are people who interact daily with capital and labor markets, forecasts, pricing, and policy. But Krugman has a good point about considering feedback, which is not likely to be something that business people are used to doing.

But the biggest problem, which Krugman does not mention, is that people who run businesses are inclined to think (or at least say) that the best economic policy is the one that helps their business. A recent example that comes to mind is Dow Chemical's ongoing effort to secure a ban on natural gas exports. Since it would be bad form to write an op-ed openly arguing that policy should be made to privilege your personal interests, we have Andrew Liveris (the CEO) making up some bad economics to portray the idea as being in the "national interest." The op-ed is a fantastic specimen. It has the usual misguided obsession with manufacturing and some standard sloppy counterfactuals about job creation. I really love the part where he blames 1990s energy price volatility on letting energy markets be driven by "legislation instead of market forces" in the context of his request for anti-market legislation. But this selfless champion of the public interest is spending big money to secure the policy. Liveris probably has a better understanding of economics than his arguments would suggest, but he will always advocate policies that help his company (like any good CEO).

This problem generalizes because the data on firm dynamics tell us that there is no representative firm. Everyone knows this, but the representative firm intuition is really hard to shake--particularly in political dialogue. There is no business person or union or advocacy group whose interests are representative of "business" or "workers," let alone representative of the economy as a whole. In a given month, the net jobs number is just a residual object, the difference between jobs created by business expansions and jobs destroyed by contractions. It's a very small number compared with the gross flows, which means that there is massive heterogeneity among firms.

Firm dynamics also makes a lot of arguments quantitatively silly. Liveris cites a BCG study finding that some sort of manufacturing renaissance will create 5 million jobs (whatever that means); he also claims that high gas prices in the 1990s destroyed 300,000 jobs. But every quarter, US establishments both create and destroy 6 to 7 million jobs. Every month we have hires and separations in the vicinity of 4 million. The forces that cause daily, pedestrian reallocation absolutely dwarf anything you can accomplish with a specific policy, whether it's immigration policy or natural gas export policy. With so many jobs being destroyed by idiosyncratic shocks, it's hard to justify any policy that is designed to protect a few hundred thousand jobs in a specific industry.

So I think that when a prominent business person prescribes policy, we should first ask how likely it is that their prescription is based on their own narrow interests. Then, we should ask if their narrow interests have any hope of being representative of the Social Planner's problem. If they're talking about a couple million jobs over a few years, chances are that the Social Planner just wouldn't care.